China Isnít Overtaking America

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A report last month that China's economy will soon become the world's largest has sparked worries. Normally calm observers are taking the news as a sign that China is overtaking America as an economic power.

But much as counting warships or troops often provides a misleading measure of military might, tallying up gross domestic product — the figure behind the latest headlines — yields a warped picture of China's economic rise.

By most meaningful yardsticks, China is still less economically powerful than the United States. The problem with the new numbers starts with how they compare economies' sizes. The World Bank tables that show China passing the United States compare the two countries using "purchasing power parity," which measures national incomes in terms of what they can buy at home.

Because domestic spending is dominated by items such as food and housing that aren't traded internationally, and because most goods and services are cheaper in China than in the United States, this comparison boosts China's apparent economic strength.

Yet compared using market exchange rates, which measure incomes in terms of what they can buy on international markets (where every country pays the same price), the United States' economy remains nearly twice as big as China's. Indeed it is this latter measure that matters most when comparing economic power.

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